First-half Mining M&A Down 31%, Year-on-year

Sector volatility had a noticeable impact on mining merger and acquisition (M&A) activity during the first half of 2013, PricewaterhouseCoopers (PwC) stated in its mid-year 2013 mining M&A report, Deals in the Dumps. While some companies took advantage of lower prices to pick up assets, the number of deals across the global mining sector fell 31% in comparison with first-half 2012, which was already considered to be a slow time for deal activity. While major companies continued to invest in their operations, many projects have been deferred, and capital spending is being curbed.

The real challenge in the current M&A market is finding buyers, PwC stated. Juniors are not seeing the level of takeovers they have come to expect at a certain stage in their growth, while majors are mostly looking to divest assets, not pick up more. In the meantime, mid-tier consolidation interest has waned due to tight financing conditions and fewer buyers overall.

A 30% slide in the value of mining equities during the first half of 2013 also impacted the size of deals. Deal value fell 74% to $20.6 billion during the first half of 2013 versus the first half of 2012, which was highlighted by Glencore International’s $54-billion bid for Xstrata, the largest-ever takeover in the sector. (The Glencore-Xstrata transaction was completed in May 2013, see story p. 6.) Even without the blockbuster Glencore Xstrata agreement, deal values were down 21% during the first half of 2013 as compared to a year earlier.

One shift so far in 2013 mining M&A has been in the geography of some of the top deals, and who’s making them. Unlike in previous years, when deals were dominated by players in countries such as Australia and Canada, top M&A activity so far in 2013 has come from former Soviet Union states, namely Russia and Kazakhstan. Russia accounted for more than a quarter of deal value by geography in the first half of 2013, followed by Kazakhstan. The United States rounded out the top three.

That’s a new lineup compared to 2012, when Canada, the United Kingdom, Switzerland (thanks to Glencore Xstrata) and China dominated the top spots for deal activity by geography.

Deals by Russian and Kazakhstan oligarchs led M&A activity during the first half of 2013. Two Russian billionaires were behind the top deal, which was for a stake in Polyus Gold International, the country’s largest gold miner, while Kazakhstan billionaires were behind the second- and third-largest transactions for the January-to-June period.

Meanwhile, the mining industry’s major public companies are taking different positions in the M&A field. Many have switched from buyers to sellers as they try to reduce debt, raise capital, and improve both balance sheets and shareholder returns.

But selling has not been easy. Rio Tinto canceled the proposed sale of both its diamonds business and Pacific Aluminum after being unable to find buyers or investors willing to pay the required price. Other miners selling off assets included BHP Billiton, which sold its 15% interest in the Jimblebar iron ore mine in Australia in the first half of 2013. The company also sold its stake in the Ekati diamond mine in Canada’s Northwest Territories, as well as its Pinto Valley copper mine in Arizona.

Many of the world’s major mining companies have taken significant write-downs over the past couple of quarters. Some of these write-downs were due to premium prices paid for deals made between 2007 and 2012.

PwC observed that many of the write-downs were taken by companies in the Western Hemisphere and Europe, as opposed to Asia. “You may not see as many write-downs relating to companies in a country such as China, where many assets are held by state-owned or private companies, which do not need to disclose such information,” said Ken Su, lead mining partner at PwC China.

Huge write-downs have contributed to a confidence crisis in the mining industry, PwC suggested. As companies work through the impacts of rising costs and volatile markets, deal activity is expected to remain muted for the remainder of 2013. Expect to see more sales of non-core assets from the major mining companies and more interest from buyers such as state-owned enterprises and possibly private equity, which is showing an increasing interest in the sector given today’s lower valuations.

“Due to the cautious climate in the mining sector right now, it’s hard to see the return of mega deals like Glencore Xstrata in 2012, or even large hostile bids such as BHP’s unsuccessful play for Potash Corp. of Saskatchewan Inc. in 2010,” PwC Global Mining Leader John Gravelle stated in concluding his executive summary to PwC’s mid-year M&A report. “Mining investors aren’t looking for companies to take big risks. Right now, they’re looking for signs of a dis